This article is an extract from the latest edition of the OFX Currency Outlook. To learn more about the euro and other major currencies and how your global business can prepare for the months ahead, download the full edition here.
European Central Bank (ECB) chief Mario Draghi has announced a new round of quantitative easing (QE) alongside a rate cut in a bid to stop the eurozone from heading into recession, in what will be one of his last actions in his current role.
Get in touch: Reach out today to learn more about how OFX can help you understand the latest currency movements.
ECB cuts rates to record low
The ECB cut rates from -0.4% to a record low of -0.5% as it announced plans to start buying €20 billion worth of commercial bonds each month in a bid to inject money into the economy. Mr Draghi is to be replaced by Christine Lagarde in November, who is moving from her current role as head of the International Monetary Fund to take charge of the ECB.
Alex Edwards, Head of Corporate Clients at OFX, said: “There was a strong feeling and consensus the ECB would announce some new QE stimulus, and we saw the euro sold against the US dollar, meaning the price was pushed down. Markets were initially selling the rumour of the QE stimulus, and then they were selling the fact after the announcement. The euro dipped below US$1.10, but it has come back above that level now.”
Mr Edwards said he suspects “it won’t be long before the ECB realises it has not gone hard enough”. He expects another cut in the deposit rate by 10 basis points (0.10) to give some additional support to the European economy in the coming months.
He added: “As long as the fundamentals in the Eurozone economy struggle, it will not be long before the markets think the ECB will need to do more.
“So, in the short to mid-term we expect the euro to stay low, but in the longer term to move higher.”
How can businesses take advantage?
European businesses who need to move money to pounds or US dollars particularly should look to protect against a lower euro. With OFX, you could do this either by using a forward contract to set the rate they will pay for the coming year no matter what happens to exchange rates, or a limit order which means you can target a rate you are keen to trade at, and OFX will monitor the markets for you and contact you when that rate is achieved.
A limit order may be particularly useful for businesses trading with the UK, as the ongoing Brexit uncertainty could mean the pound falls much more than the euro, and relatively speaking would give eurozone businesses an advantage to gain in this scenario by not being tied to a specific rate.
US-China trade war continues to have an impact on eurozone economy
Inflation in the eurozone is falling and with Germany and Italy particularly on the verge of a recession, plus with the ongoing US-China trade war affecting global confidence there is no certainty as to how long the stimulus package will need to last.
The ECB’s Governing Council expects the key ECB interest rates to remain at the same or lower levels until it sees inflation head towards the 2% target.1
The Eurozone’s second quarter growth fell to 0.2%, halving from the Q1 figure of 0.4%3, and Mr Draghi is pushing the 19 eurozone countries, especially Germany, to start investing in projects that would boost their own economies.
However, it is not all bad news for Europe. Luca Paolini, chief strategist at Pictet Asset Management, said: “Europe has been improving recently thanks to momentum in France and Spain. A fresh round of stimulus from the ECB should also help.”
Trump attacks weaker euro
President Trump was once again active on Twitter accusing the ECB of weakening the euro deliberately to hurt US exports4. The euro has weakened as a result of the ECB’s actions, but its performance against the US dollar does not drive these decisions.
However, President Trump’s tariff threats and actions are impacting the European economy. Even though discussions between the US and China to end the trade war start again in October, Chris Turner, global head of strategy and head of EMEA and LATAM research at ING and Petr Krpata chief EMEA FX and IR strategist for ING, said they expect “further deterioration in the trade war this year”.
ING5expects the eurozone to face tougher global headwinds as one of the most open economies in the G10 FX space, “compared to the relatively closed US economy6”, especially as there is an ongoing threat of tariffs being applied to EU exports.
Brexit uncertainty continues
Of course, it is impossible to talk about the eurozone without mentioning Brexit, although at present there is no movement on the part of the EU that has been made public. Michel Barnier has even said there is no reason for the EU to reopen talks with the UK7and that the situation remains “serious and uncertain”, so we are still in the dark about any specific Brexit direction.
Businesses and individuals trading in euros need to speak to a currency specialist
Back in June, EUR/USD was 1.1494, and the combination of a strengthening US dollar as the global uncertainty takes hold and the weakening euro means at the time of writing in September it was worth 1.1111.The change in a matter of months is significant and proves the importance of keeping up-to-date with exchange rate fluctuations if you have a considerable amount of money to move in or out of euros.
What to watch
The stimulus package looks set to boost the eurozone economy,but its success will only be known in the coming months. In the meantime, uncertainty around Brexit and the US-China trade war continues to drag on the trading bloc’s growth prospects–the 28 countries who have harmonised trade terms, which will fall to 27 when and if the UK finally leaves.
With so much volatility around Brexit and the trade war, it’s reassuring having someone to stay on top of market moves 24/7 for your business.Now more than ever, ‘when’ you transact could have a significant impact to your bottom line. With OFX you can talk to one of our local currency experts anytime of day or night to discuss your currency objectives. Our experts will always give you the latest information on how your currency trades could be affected by global influences.
IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.